France’s banks lose their Street cred

By Felix Salmon
September 13, 2011

It’s looking increasingly as though the proximate cause of the next big global crisis is going to be a liquidity crunch at French banks, rather than a European sovereign default. This is not the kind of stock chart that any leveraged institution likes to see:

bnp.tiff

BNP Paribas started July trading at €55 per share; it’s now at €27, and there’s no bottom in sight. And that’s making lenders very nervous, according to Nicolas Lecaussin.

“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell.”

And Andrew Ross Sorkin, today, points out that Christine Lagarde, after being forthright about the need for European bank capitalizations, has recently been, well, less so. Banks live or die on confidence, and it helps no one if the managing director of the IMF does anything to erode that confidence during a liquidity panic. Largarde’s right that European banks in general — and French banks in particular — need to be recapitalized. But now is not the time to be saying such things, just because statements along those lines, in today’s febrile environment, can cause banks to collapse even before new capital is lined up.

It should go without saying that the banks themselves have to be upfront about the current situation. This kind of thing only makes matters much worse, since it causes markets to discount everything they say:

In the opinion of BNP Paribas, the largest French bank, the market for Greek bonds is inactive, never mind the fact that there are trades every day. It pointed to “the lack of liquidity seen during the first half of 2011” as it concluded market prices were “no longer representative of fair value.” It is now using a model to determine value…

Many banks applied a haircut to all of their Greek bonds, including the long-term ones not covered by the proposed exchange. But some banks, including BNP Paribas and Société Générale in France and Intesa Sanpaolo in Italy, decided to carry the long-term bonds at full value, on the theory that it would all work out and that European governments had promised not to force exchanges of longer-dated bonds…

On Thursday, the average trading price for such bonds was about 37 percent of par value.

The market has good reason to be worried about the French banks. They own $57 billion in Greek sovereign and private debt — more than all German and British banks combined. And they have well over half a trillion euros in Spanish and Italian debt, most of which is trading at a substantial discount to par, if it trades at all.

As a result, the only way for the French banks to be able to project a credible degree of solvency is for the Eurozone to inject a huge amount of money somewhere. Either it goes into the countries the French banks have lent to, and will then be used to pay back the French banks what they’re owed, or else it just goes into the French banks directly — the TARP solution. But if the EFSF isn’t beefed up and deployed very soon, we could see some extremely big French banks either collapse or get nationalized in very short order. And nobody wants to see where the chain reaction from that would lead.

13 comments

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Take the $57B. France can afford to underwrite all of that but of course some will have value.

Posted by jomiku | Report as abusive

“It should go without saying that the banks themselves have to be upfront about the current situation.”

Remember that point John Quiggin made about how free markets and how the Great Moderation failed?

Posted by GRRR | Report as abusive

Not sure of the name or when I read it (though I think it was on Reuters), but there was a Frog from Soc Gen last year or earlier this that said when this was all getting started it would get so bad that the Euro would die and may the EU. So far he’s been pretty on target. I think the French have been in panic mode since Kerviel’s little number back in ’08. There were lots of little odd things that the French govt. and Bank of France did to avoid a disaster, like delaying notification to the rest of the world, while they unwound his positions. The great unwinding came at the expense of the counter-parties, most of whom were non-French. I think it was probably the only thing that kept SocGen afloat. These guys have known for a while…

Posted by ARJTurgot2 | Report as abusive

Isn’t it reporters who are causing the decline in confidence by, as usual, making crap up?

Posted by Danny_Black | Report as abusive

It is, of course, bad if they’re trying to lie to us, but it’s far worse if they actually believe this themselves. The accusation that they aren’t “be[ing] upfront” with us smacks of unwarranted optimism.

Posted by dWj | Report as abusive

“BNP Paribas started July trading at €55 per share; it’s now at €27, and there’s no bottom in sight. And that’s making lenders very nervous, according to Nicolas Lecaussin.”

Well, have a look at Deutsche Bank stock (symbol DB): it was around $60 in May…yesterday at $31. So roughly the same 50% haircut as BNP in this timeframe.

Posted by NedStark | Report as abusive

Take the haircut and let Greece default..Forget about EFSF Or TARP.. Start over or get ready for new northern Euro

Posted by Ashishnfl | Report as abusive

This is unbelievable.

I do have question though, if the ECB has committed to give infinite liquidity to the big banks, does that negate the risk of a Lehman Style Liquidity run / funding crisis?

Any idea what the terms of liquidity support would be? Another one of your commentors on your post yesterday said that Trichet has committed to support the banks with liquidity, but i’m not sure what exactly that means.

Thanks again for all the great work Felix

Posted by EconMaverick | Report as abusive

Given all that – the French banks rallied like a mother today. Go figure!

Posted by Bernanke | Report as abusive

Never mind the French banks – what about the Spanish non performing loans to property developers? These are billions and so far these have escaped the attention of the rating agencies. For how long though?

Posted by pavlaki | Report as abusive

Felix, every bank today has the same stock profile. Do your homework. Look at Nedstark: he took more trouble in preparing his comment.

Next comment: $57 billion sounds big but it it is nothing. It is miniscule. It is so tiny it fits into the ECB rescue package NINE times. What do you want to achieve by including the Spanish and Italian bonds ? Panic ?

Look at the miserable state of the U.S. Then you will get some shivers. Sick economics. But don’t bother us with fingerpointing. Bye, Felix.

Posted by FBreughel1 | Report as abusive

The future looks bleak for French banks. The same applies to Spanish and (don’t forget) German banks. Nobody has to be hugely sorry for France and Germany taking a hit from Greece’ default: by sabotaging the Stability Pact they played a very important part in allowing Greece and Italy to take the rest of Europe for a ride.

How come, by the way, that the French banks are so loaded with Greek, Spanish and Italian debt? Could it be that our boys were doing some pretty heavy betting? 560 billion! Now trading at 40%-50%, wouldn’t it mean that French banks already are 250 billion euro down?

Posted by Lambick | Report as abusive

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